Skip to Content

Notice

Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding NASD's Exemptive Authority Relating to Regulation NMS Trade Reporting Requirements

Document Details

Information about this document as published in the Federal Register.

Published Document

This document has been published in the Federal Register. Use the PDF linked in the document sidebar for the official electronic format.

Start Preamble May 15, 2007.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] notice is hereby given that on May 10, 2007, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by NASD. NASD has designated this proposal as one constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule under Section 19(b)(3)(A)(i) of the Act [3] and Rule 19b-4(f)(1) thereunder,[4] which renders it effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

NASD is proposing to adopt new NASD Rule 5150 to provide NASD with authority to exempt members from certain new NASD trade reporting requirements for the Alternative Display Facility (“ADF”) and the NASD Trade Reporting Facilities (“TRFs”) relating to Regulation NMS. The text of the proposed rule change is available at NASD, the Commission's Public Reference Room, and http://www.nasd.com. Start Printed Page 28742

II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

1. Purpose

On June 29, 2005, the Commission published its release adopting Regulation NMS,[5] which established new substantive rules designed to modernize and strengthen the regulatory structure of the U.S. equities markets. Pursuant to Regulation NMS, the Commission, among other things, adopted Rule 611 (“Order Protection Rule”) to establish protection against trade-throughs for NMS stocks.[6] There currently are nine exceptions and two exemptions to the Order Protection Rule.[7]

NASD does not qualify as a trading center within the meaning of Regulation NMS.[8] However, NASD has a responsibility to enforce requirements under the Act that apply to activity within its regulatory authority. Unlike exchanges that have direct Regulation NMS obligations with respect to the self-regulatory organization trading facilities, NASD has indirect Regulation NMS obligations with respect to all over-the-counter market activity in NMS stocks, including post-trade regulation for compliance with the Order Protection Rule with respect to trading centers that trade report through the ADF or a TRF.

Consistent with Regulation NMS, NASD amended its rules governing trade reporting to the ADF and TRFs to require reporting members to append applicable modifiers to last-sale transaction reports for trades that fall within Rule 611 exceptions and exemptions.[9] The amendments to the ADF trade reporting rules (specifically, Rule 4632A) became operative on March 5, 2007. The amendments to the trade reporting rules relating to the TRFs (specifically, Rules 4632, 4632C, 4632D, and 4632E) will become operative on the Regulation NMS Pilot Stocks Phase Date, which is scheduled to occur on July 9, 2007.[10]

The Financial Information Forum (“FIF”) submitted a comment letter in response to these rule changes.[11] The FIF Letter states that implementation of the new NASD trade reporting modifiers relating to Regulation NMS (specifically, the self-help modifier, the qualified contingent trade modifier, the sub-penny modifier, and the modifier used to distinguish between inbound and outbound intermarket sweep orders) will require additional development efforts and will present a challenge to certain member firms. The FIF Letter further asserts that implementation of the self-help modifiers in particular will be a time-consuming and costly effort and, without substantial development changes, some firms may be forced to not implement self-help to the detriment of their customers. Finally, the FIF Letter states that, if NASD determines that it must have this information for regulatory reasons, firms should be given more time to modify their systems and requests that the compliance date for the new trade report modifiers for purposes of reporting to a TRF be moved to the Regulation NMS Completion Date, which is currently anticipated to be October 8, 2007.

In response to the FIF Letter and in recognition of the technological burdens that the new NASD trade report requirements may impose on some members, NASD is proposing to adopt new Rule 5150 to provide NASD with exemptive authority. Specifically, Rule 5150 would allow members that are unable to complete necessary systems changes by the applicable compliance date to seek a temporary exemption from the new trade report requirements related to Regulation NMS found in Rules 4632, 4632A, 4632C, 4632D, and 4632E. NASD will grant such an exemption only on a firm-by-firm basis, for good cause shown after taking into consideration all relevant factors and only if it is consistent with the protection of investors and the public interest.

In general, the new trade reporting requirements provide critical information for purposes of NASD's Regulation NMS regulatory program. As such, NASD does not intend to grant exemptions under the proposed rule except in exceptional circumstances and only where the requester has demonstrated that it has made best efforts to comply in a timely fashion with the new trade reporting requirements related to Regulation NMS and there is a specific, limited problem or issue preventing the member from achieving full compliance. A member requesting an exemption will be required, among other things, to: (1) Explain why it is unable to complete the necessary systems changes by the applicable compliance date; (2) identify the specific new Regulation NMS-related trade reporting modifier(s) (e.g., self-help) that the firm is unable to implement in a timely manner; and (3) provide an estimated completion date for the outstanding systems work and full compliance. As set forth in the proposed rule, NASD will determine the duration of any exemption, which shall not exceed six months. Moreover, since concerns raised by the industry relate only to certain Regulation NMS-related trade modifiers (the self-help modifier, the qualified contingent trade modifier, the sub-penny modifier, and the modifier used to distinguish between inbound and outbound intermarket sweep orders), NASD will exercise exemptive authority under this rule proposal only to address implementation issues related to these particular modifiers.

NASD intends to exercise the exemptive authority proposed herein on a temporary basis and, as such, the proposed rule change will automatically Start Printed Page 28743sunset one year after the Pilot Stocks Phase Date, currently scheduled to occur on July 9, 2007. NASD has filed the proposed rule change for immediate effectiveness.[12] The proposed rule change will become operative upon filing with the Commission.

2. Statutory Basis

NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,[13] which requires, among other things, that NASD rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed exemptive authority is appropriate because it will allow NASD to address certain implementation issues as they arise.

B. Self-Regulatory Organization's Statement on Burden on Competition

NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

While NASD did not solicit comments on the proposed rule change, as discussed above, NASD did receive a comment letter in connection with SR-NASD-2007-002.[14] NASD is filing the proposed rule change specifically to address this comment letter and the concerns raised by the commenter about the burdens associated with implementation of the new Regulation NMS-related trade report modifiers. As noted above, NASD has determined that the Regulation NMS-related modifiers required under the NASD trade reporting rules are crucial to its regulatory program and does not agree with the commenter that the self-help modifier should be optional. NASD believes that the proposed exemptive authority strikes a fair balance between the needs of NASD's regulatory program and member concerns regarding the timing and burdens of the necessary systems changes. The proposed rule change should alleviate such burdens by affording members additional time, if needed, to make the necessary systems changes relating to the self-help modifier, the qualified contingent trade modifier, the sub-penny modifier, and the modifier used to distinguish inbound and outbound intermarket sweep orders.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The foregoing proposed rule change has become effective pursuant to Section 19(b)(3)(A)(i) of the Act [15] and subparagraph (f)(1) of Rule 19b-4 thereunder,[16] because it constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:

Electronic Comments

Paper Comments

  • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2007-032. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/​rules/​sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of the filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2007-032 and should be submitted on or before June 12, 2007.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[17]

Jill M. Peterson,

Assistant Secretary.

End Signature End Preamble

Footnotes

3.  15 U.S.C. 78s(b)(3)(A)(i).

Back to Citation

5.  See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005).

Back to Citation

6.  NMS stock is defined in Rule 600(b)(47) of Regulation NMS as “any NMS security other than an option.” Rule 600(b)(46) of Regulation NMS defines NMS security as “any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.”

Back to Citation

7.  See 17 CFR 242.611; Securities Exchange Act Release Nos. 54389 (August 31, 2006), 71 FR 52829 (September 7, 2006) (Order Granting an Exemption for Qualified Contingent Trades from Rule 611(a) of Regulation NMS) and 54678 (October 31, 2006), 71 FR 65018 (November 6, 2006) (Order Exempting Certain Sub-Penny Trade-Throughs from Rule 611 of Regulation NMS).

Back to Citation

8.  It should be noted that while NASD is not a trading center, market participants that quote in NMS stocks in the ADF are trading centers.

Back to Citation

9.  See generally, Securities Exchange Act Release Nos. 54537 (September 28, 2006), 71 FR 59173 (October 6, 2006) (SR-NASD-2006-091, amending ADF rules); 55088 (January 11, 2007), 72 FR 2573 (January 19, 2007) (SR-NASD-2007-001, amending ADF rules); 55101 (January 12, 2007), 72 FR 2568 (January 19, 2007) (SR-NASD-2007-002, amending NASD/Nasdaq TRF rules); and 55346 (February 26, 2007), 72 FR 9807 (March 5, 2007) (SR-NASD-2007-014, amending NASD/NSX TRF rules, NASD/BSE TRF rules, and NASD/NYSE TRF rules).

Back to Citation

10.  Members may submit trade reports to the TRFs in compliance with the Regulation NMS requirements on a voluntary basis prior to the Pilot Stocks Phase Date.

Back to Citation

11.  See letter from Manisha Kimmel, Executive Director, FIF, on behalf of the FIF Regulation NMS Working Group, to Nancy M. Morris, Secretary, Commission, dated February 7, 2007, submitted in response to SR-NASD-2007-002 (“FIF Letter”).

Back to Citation

12.  NASD is filing this proposed rule change for immediate effectiveness to allow NASD to address exemptive requests immediately without regard to when the changes to the underlying trade reporting rules are operational.

Back to Citation

14.  See FIF Letter, supra note 11.

Back to Citation

15.  15 U.S.C. 78s(b)(3)(A)(i).

Back to Citation

[FR Doc. E7-9741 Filed 5-21-07; 8:45 am]

BILLING CODE 8010-01-P